Basic Elements of Demand and Supply
Understanding the nuances of supply and demand is integral to comprehending the functioning of markets. We will delve into key concepts and determinants prevalent in this subject.
Determinants of Demand
1
Price
An increase in price usually leads to a fall in demand and vice versa (law of demand).
2
Consumer Income
Higher income leads to demand for superior quality goods, causing an overall increase in demand.
3
Tastes & Preferences
Changing consumer preferences may increase or decrease the demand for a particular product or service.
4
Substitutes & Complements
Affordability and availability of substitutes can affect the demand of a product, whereas, complements complement (duh!) the demand for a product.
Determinants of Supply
Production & Resource Costs
Higher production and resource costs lead to lower supply.
Technology
Improvements in technology can lead to cheaper and more efficient production, causing an increase in supply.
Number of Suppliers
An increase in the number of suppliers leads to an increase in supply.
Natural Factors
Natural calamities or seasonal changes affect the availability of goods, affecting supply as well.
Market Equilibrium
Equilibrium Definition
A state of balance between demand and supply, where the quantity demanded equals the quantity supplied.
Equilibrium Price
Price at which demand and supply curve intersect and the quantity demanded is equal to the quantity supplied.
Position of Market Equilibrium
Market equilibrium is achieved at the point where the demand and supply curves intersect, denoting an ideal allocation of resources.
Impact of Changes in Demand and Supply
1
Change in Demand
Shifts in demand curve lead to shifts in the equilibrium point, resulting in changes in both price and quantity.
2
Change in Supply
Shifts in supply curve also lead to shifts in equilibrium, causing changes in both price and quantity.
3
Effects of Shifts
Shift in either curve will result in effects on both price and quantity; these effects could either be simultaneous or lagged.
Price and Quantity Adjustments
Shift in Demand
If demand increases, it leads to a rightward shift in the demand curve, increasing price and quantity.
Shift in Supply
When supply increases, it leads to an increase in quantity and decrease in price.
Simultaneous Shifts
If both curves shift in a similar direction, the impact on both quantity and price can either be certain or ambiguous.
Conclusion
Key Takeaways
Understanding the elements of demand and supply and their interaction can help us analyze different economic variables better.
Importance of Supply and Demand
It can provide valuable insights when making any financial and business decisions in response to the dynamic supply and demand conditions.
Markets are Dynamic
Supply and demand shift continuously due to several macro and micro factors. It's imperative to monitor and adapt to these changing conditions for success in any industry.